Executive summary

Land conversion, particularly deforestation, poses a significant threat to ecosystems and the fight against climate change. This activity often intersects with financial crimes like corruption, money laundering, and fraud. Financial institutions are exposed to these risks through investments and financing of commodities such as cattle, soy, and palm oil. Upcoming legislation in various jurisdictions aims to address deforestation from a funding perspective, increasing regulatory risk for financial institutions.

A survey of financial services professionals revealed gaps in institutional knowledge and vulnerabilities in handling proceeds of land conversion-related crimes. Many institutions operate in high-risk sectors without adequate due diligence. The report recommends that firms look beyond legal definitions of land conversion, as the risk of convergence with other crimes is substantial. It also suggests that land conversion itself could be treated as a red flag for other financial crimes.

Introduction

Land conversion has devastating environmental and social impacts, including biodiversity loss, climate change, and human rights violations. It also facilitates a web of global crime, depriving governments of tax revenue. Financial institutions are exposed to these risks through various activities, including trade finance, commercial lending, and investment banking. They have a crucial role in investigating illicit financial flows and mitigating their exposure to land conversion-linked crimes.

The issue: Land conversion

Land conversion refers to the substantial and sustained change of a natural ecosystem to another land use. Deforestation is a specific type of land conversion that has garnered significant attention. Land conversion can be legal or illegal, although the distinction is often blurred due to variations in legislation, ambiguity in definitions, and lack of clarity over land tenure.

Financial institutions’ exposure to land conversion

Financial institutions are exposed to land conversion risks through investment, capital provision, and financing of commodity trade. This exposure can materialise through business activities, high-risk commodities, and various stages of the value chain. Key business activities include trade finance, commercial bank lending, investment banking, and correspondent banking. High-risk commodities driving land conversion include cattle, soy, palm oil, timber, cocoa, coffee, rubber, minerals, oil, and gas. Financial institutions face physical, legal, and reputational risks associated with land conversion.

Convergence with predicate crimes – The risk to financial institutions

Predicate crimes are underlying criminal acts that generate proceeds for subsequent illegal activity, often linked to money laundering. Land conversion frequently intersects with predicate crimes such as illegal mining, illegal logging, drug trafficking, organised crime, and corruption. These crimes can drive, enable, or correlate with land conversion, posing significant risks to financial institutions.

Case studies

The report presents case studies illustrating the convergence of predicate crimes with land conversion. These include cattle laundering in South and Central America, laundering illegally mined gold in Colombia, and bribery and corruption in Papua New Guinea’s palm oil and logging sectors. These cases highlight the diverse ways in which financial crimes are intertwined with land conversion activities.

The view from financial institutions: Results from a survey assessing industry awareness and attitudes towards land conversion and associated predicate crimes

A survey of financial services professionals revealed varying levels of awareness and understanding of land conversion-related financial crime risks. While some institutions have implemented due diligence measures and red flag indicators, others lack specific policies and controls. The survey also identified challenges related to data quality, information sharing, and internal collaboration. The report recommends that financial institutions prioritise land conversion as a financial and reputational risk, invest in training and resources, and strengthen internal collaboration between ESG and financial crime departments.